Washington, Jan 1: As US Treasury Secretary Timothy F. Geithner formally notified Congress that the government reached its statutory borrowing limit on New Year's Eve, there was a last minute deal to avert a fiscal cliff on spending cuts and sweeping tax increase. The Senate voted today on the deal that misses big picture. However, by resorting to some creative accounting tricks, the Treasury Department can for two months keep the government from defaulting.
And what emerged out of night-long negotiations and months of debates was a tax increase for the wealthy instead of path-breaking plans to overhaul the individual tax code, tackle corporate rates, revamp the Medicare program and changes in Social Security.
Under the agreement reached late on Monday night, tax rates would jump to 39.6 percent from 35 percent for individual incomes over $400,000 and couples over $450,000, while tax deductions and credits would start phasing out on incomes as low as $250,000, a clear win for President Barack Obama, who campaigned on higher taxes for the wealthy.
Democrats also secured a year's extension of unemployment insurance without strings attached and without offsetting spending cuts, a $30 billion cost. Democrat and Republican negotiators also agreed to put off $110 billion in across-the-board cuts to military and domestic programs for two months while broader deficit reduction talks continue.
The deal would reinstate provisions to tax law, ended by the Bush tax cuts of 2001, that phase out personal exemptions and deductions for the affluent. Those phaseouts, under the agreement, would begin at $250,000 for single people and $300,000 for couples.
The estate tax would also rise, but considerably less than Democrats had wanted. The value of estates over $5 million would be taxed at 40 percent, up from 35 percent. Democrats had wanted a 45 percent rate on inheritances over $3.5 million.
Under the deal, the new rates on income, investment and inheritances would be permanent, as would a provision to stop the alternative minimum tax from hitting middle-class families.
However, the nature of the deal was such that it does not end the war between the White House and Congressional Republicans on spending and taxes and it would continue at least until the spring. Had no deal been struck, budget experts warned that the fragile US economy could have been sent spinning back into recession by the $500 billion combined whack from spending cuts and tax hikes. The would put off $109 billion in budget cuts across the government for two months, but in the process set the stage for a new showdown between Obama's Democrats and Republicans in dysfunctional Washington at the end of next month.